Compensation and 1099 Dividends

[Lori H]

A small doctors office has a profit sharing plan. The plan defines comp as W-2 wages. The practice is an S Corporation and in calendar year 2008, the Doctor did not receive W-2 wages but received dividends, which I believe was reported on a 1099. I believe this is something he did under the advice of his book keeper( he does not have a CPA). The adoption agreement only offers the following options for compensation: W-2, Section 3401(a) wages or 415 safe harbor compensation.

I am under the impression that should he choose to make a profit sharing allocation, he gets ZERO since he claimed no W-2 wages. Nor do I think retroactively amending the plan's definition of compensation would accommodate dividend payments. Am I thinking right?

[Bird]

You're right.

I would do him a favor and tell him in no uncertain terms that he needs to pay himself "reasonable" comp and that just because his bookkeeper says to do it this way doesn't make it ok. He's asking for serious trouble.

[K2retire]

Many tax advisers tell clients to pay themselves nothing but dividends to avoid Social Security and Medicare taxes. Unfortunately, they forget that also means no retirement plan income.

You can't have your cake and eat it too.

[J Simmons]

You're right.

I would do him a favor and tell him in no uncertain terms that he needs to pay himself "reasonable" comp and that just because his bookkeeper says to do it this way doesn't make it ok. He's asking for serious trouble.

Bird's right. Pigs get fat, hogs get slaughtered. If he doesn't pay himself a 'reasonable' comp, he'll get slaughtered by the IRS.

[TPA Bob]

You're right.

I would do him a favor and tell him in no uncertain terms that he needs to pay himself "reasonable" comp and that just because his bookkeeper says to do it this way doesn't make it ok. He's asking for serious trouble.

Bird's right. Pigs get fat, hogs get slaughtered. If he doesn't pay himself a 'reasonable' comp, he'll get slaughtered by the IRS.

All are right, except the dividend is not reported on a 1099 but is reported on the K-1 from the S Corp